THE ECONOMY

AS THE LEBANESE state fragmented, so too did the national economy.
Many observers have argued that because of this fragmentation, there was
not one economy in the late 1980s, but several. Areas held by some
militia groups, most notably the Maronite Christian heartland controlled by the Lebanese Forces,
appeared well on their way to becoming de facto ministates. These
militias were successfully usurping basic functions of government such
as taxation and defense.

Despite the fragmentation, there were still some shreds of the
official economy. In late 1987 the main port of Beirut and Beirut
International Airport were subject to intermittent government
regulation. The Central Bank (also cited as Bank of Lebanon or Banque du
Liban) maintained sizable financial reserves, although these declined
sharply in the mid-1980s. There were spiraling budget deficits as the
government attempted to reestablish the credibility of its security
forces and maintain at least some social services.

Measuring the government's impact, however, was another matter.
Although the government's financial role in the economy was growing, its
role in the daily economic affairs of the Lebanese people was declining.
The importance of the official economy in the late 1980s depended on
where one lived and how one felt politically. But the economic collapse
could not be separated from the human tragedy. For example, two of the
most salient facts of life in Beirut in February 1987 were the collapse
of the Lebanese pound to less than one-hundredth of a United States
dollar and the request by Palestinian religious authorities for a ruling
on whether or not it would be permissible for the besieged refugees in
the camps at Burj al Barajinah and Shatila to eat their dead. In a
country where violence had become endemic, where some 130,000 people had
been killed and a further 1 million--a third of the population--had been
injured, calculating the impact of the central government on the economy
would be impossible.

In the years that followed the outbreak of the 1975 Civil War,
political developments dominated economic affairs. Improved security
conditions--such as from late 1976 to early 1978, or from September 1982
to January 1984--yielded considerable economic benefits, as relative
peace enabled the recovery of commerce. Peacekeeping forces--Syrian,
Israeli, United Nations, United States, and West European--brought with
them favorable economic conditions in the communities where they were
stationed. But the positive effects were frequently shortlived. For
example, when Syrian troops entered Beirut in February 1987 (the first
time a recognized power had attempted to enforce its authority in the
capital since the February 1984 collapse of the Lebanese Army), there
was a brief flurry of guarded economic optimism. The upswing of the
Lebanese pound lasted only three weeks. But overall instability was the
norm from 1975 to mid-1987, and it became clear that nothing short of a
total change in the country's political and security structure--in
effect, the end of sectarian partitions and militia rule--would lead to
any sustained revival of what had once been one of the world's most
vibrant economies.

By 1987 Lebanon had entered an era where reliable statistics on the
state of the economy were usually absent. Lebanese economists were
sometimes able to compile a few indicators, but the numbers were often
based on incomplete data. But even without complete statistics, the
downward trend of the national economy was obvious.

Bearing testimony to this trend, the Lebanese National Social
Security Fund reported in May 1986 that 40 percent of the 500,000-
strong private sector work force was unemployed. Industry was running at
barely 40 percent of capacity, and per capita income was down to around
US$250 a year in 1986, five times lower than eleven years earlier.

In 1985 estimates of the gross domestic product (GDP) varied from Lú30 billion to as high as Lú48.3 billion. In either case, GDP was no more than half of
what it was in real terms in 1974.

Although the collapse of GDP began with the start of the Civil War,
the fall of the Lebanese currency began much later. On the eve of the
war, it required only Lú2.3 to buy a United States dollar. Currency
values declined over the next several years, but it was not enough to
destroy the basic Lebanese confidence in the pound, which was backed by
substantial holdings of gold and foreign exchange. Whereas in 1981 the
exchange rate had averaged Lú4.31 to the dollar, by the end of 1982,
with the new government of President Amin Jumayyil (also spelled
Gemayal) in office, the exchange rate was back to Lú3.81 to the dollar.

The pound, however, began depreciating rapidly in the aftermath of
further Beirut clashes in early 1984 and the withdrawal of the
Multinational Force (MNF) of peacekeeping troops from the capital.
Although there was widespread currency speculation, the Central Bank
could do little to investigate this problem became of Lebanon's tough
banking secrecy laws.

Between January and December 1984, the pound lost just under half its
value against the dollar, while in 1985 the trend gained speed,
resulting in a further 60-percent erosion in value. The Central Bank was
widely criticized, especially by the commercial banks, for failing to
act decisively to halt the pound's slide. But even greater criticism was
directed against commercial bankers and leading politicians, who were
constantly accused of speculating against the national currency.

By 1986 the country was on the verge of hyperinflation as the pound
lost almost 85 percent of its already shrunken value during the course
of the year. On February 11, 1987, the currency crashed through the
psychologically important barrier of Lú100 to the dollar and continued
its fall. By August the pound was trading at more than Lú250 to the
dollar. Compounding the problem was that these events occurred after a
year in which the dollar had fallen sharply against most major
international currencies.

The fundamental principle of the Lebanese banking system had been a
freely convertible pound. Citizens were free to hold foreign currency
accounts in their banks, and remittances received from friends and
family living abroad could be processed with relative ease through
banking channels. As the pound began its decline, the importance of
foreign currencies (particularly the United States dollar) grew, and a
"twin currency" economy emerged. Complex systems were soon set
up to circumvent the banking system, not for fear of governmental
interference but to prevent the loss of deposits or of letters of credit
through bank robberies. In the twin currency economy, foreign cash and
drafts on bank accounts held outside the country became increasingly
common. It became impossible, however, to calculate how much foreign
cash was entering the country once transfers began to bypass the banking
system. But it was clear that most people were not receiving enough to
retain their pre-1975 living standards.

By 1987 ordinary Lebanese were living in a very strange economy.
Public services functioned according to the ability of the government to
pay staff, the ability of different groups to tap into utilities (with
or without official permission) and the ability of local groups (with or
without official help) to keep services operational. The costs of
basics, such as gasoline, home fuel oil, and cooking gas were all
subject to government price restraints, yet prices could double or
triple in times of shortages, as roads between refineries, gasoline
pumps, and fuel depots were cut. People found the government price
controls ineffective, and the struggle to secure vital goods and
commodities reflected not so much a free market as a free-for-all. By
1987 a dozen years of conflict had shown them that economic control, as
well as political power, came from the barrel of a gun.

By the late 1980s, years of conflict had distorted the economy. Total
GDP was down, but the proportion of GDP contributed by the government
was up. The national currency collapsed, and the country began
sustaining balance of payments deficits. One commentator noted that 1986
marked the first time since the Civil War started in 1975 that Lebanon
had suffered economic hardship to such an extent that it had affected
the middle classes as well as the traditional urban poor. Another
observer argued that Lebanon, once the model of modernity in the Middle
East, was being threatened with "de-development."